Rate rise dormant, not dead, warns Reserve

By Tim Colebatch Economics Editor CanberraAugust 22 2002

The Reserve Bank's plan to raise interest rates back to normal levels had been "delayed" by the slump in global stock prices but it was very unlikely to be "overturned", the bank's governor, Ian Macfarlane, said yesterday.

Speaking in Brisbane, Mr Macfarlane left little doubt that further rate rises were ahead once uncertainty over global economic conditions had settled.

In his first public comments on interest rates for three months, he warned of the dangers of relying on "very low interest rates" to sustain growth, and reiterated the Reserve's goal of returning rates to neutral or "normal" levels. "We expect interest rates to be normal in periods when the economy is operating in a normal or healthy way," he said.

"Fortunately, the Australian economy is in that small group of countries that can rightly be described as operating in a normal or healthy way."

But as he spoke, new economic data pointed to a slowing of Australia's run of rapid, debt-fuelled growth:");document.write("

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The Westpac-Melbourne Institute leading index of economic activity slumped dramatically in June, falling from 4.6 per cent growth to 1.6, led by steep falls in share prices and non-residential building approvals.

Westpac chief economist Bill Evans said the slump pointed to economic growth slowing and unemployment rising over the second half of 2002 and into 2003. He forecast no further increase in interest rates until "well into 2003".

The Reserve revealed the growth in credit-card debt was slowing. Australians owed a record $21 billion on credit cards at June 30, up $2.5 billion, or 14 per cent, in a year, but this was the slowest growth for seven years. In absolute dollars, it was the smallest rise for three years.

Delivering the Colin Clark lecture at the University of Queensland, Mr Macfarlane warned new investors in housing that they risked losing their money, but played down the Reserve's concerns over the housing market.

While the Reserve was "not entirely comfortable" with the rapid growth in housing prices, he said, it would not allow those concerns to dictate the level of interest rates. Australia has not had a "boom" in house prices, but rather, "large rises", which have made it difficult for young people to enter the market.

"This is mainly a wealth distributional issue, rather than something that directly affected the economy's ability to continue its low-inflation economic expansion", he said.

"It is not something that can or should be directly addressed by monetary policy."